Working Ventures Canadian Fund Inc. and Working Ventures Opportunity Fund Inc. - MRRS Decision
Headnote
Exemption granted to labour sponsored investmentfund corporation to permit it to hold its investment in anotherlabour sponsored investment fund which the top fund is a substantialsecurity holder. Exemption also granted to the bottom fund toinvest in an issuer in which the top fund has a significantinterest.
Statutes Cited
Securities Act, R.S.O. 1990, c. S.5, as am.clause 111(2)(b), clause 111(2)(ii) and s. 113.
IN THE MATTER OF
THE SECURITIES LEGISLATIONOF
ONTARIO, BRITISH COLUMBIA,ALBERTA, SASKATCHEWAN,
NOVA SCOTIA AND NEWFOUNDLANDAND LABRADOR
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEWSYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
WORKING VENTURES CANADIANFUND INC.
WORKING VENTURES OPPORTUNITYFUND INC.
MRRS DECISION DOCUMENT
WHEREAS the local securities regulatoryauthority or regulator (the "Decision Maker") in eachof Ontario, Alberta, British Columbia, Saskatchewan, Nova Scotiaand Newfoundland and Labrador (the "Jurisdictions")has received an application from Working Ventures Canadian FundInc. ("WV Canadian Fund") and Working Ventures OpportunityFund Inc. ("WV Opportunity Fund", formerly, WorkingVentures II Technology Fund Inc.) for a decision under the securitieslegislation of the Jurisdictions (the "Legislation")that:
i) the requirement contained in the Legislationprohibiting a mutual fund from knowingly holding an investmentin a person or company in which the mutual fund, alone ortogether with one or more related funds, is a substantialsecurity holder (the "Investment Restrictions"),shall not apply to WV Canadian Fund's investment in WV OpportunityFund; and
ii) the requirement in the Legislation prohibitinga mutual fund from knowingly making and holding an investmentin an issuer in which any person or company who is a substantialsecurity holder of the mutual fund has a significant interest(the "Significant Interest Restrictions"), shallnot apply to WV Opportunity Fund for the purpose of makingor holding investments in issuers in which WV Canadian Fundhas a significant interest;
AND WHEREAS under the Mutual RelianceReview System for Exemptive Relief Applications (the "System"),the Ontario Securities Commission is selected as the principalregulator for this application;
AND WHEREAS, unless otherwise defined,the terms herein have the meaning set out in National Instrument14-101 Definitions;
AND WHEREAS WV Canadian Fund and WV OpportunityFund (collectively as the "Funds" and individuallyas the "Fund") have represented to the Decision Makersthat:
1. The Funds are labour-sponsored investmentcorporations (LSIFs) registered under the Community SmallBusiness Investment Funds Act (Ontario) (the "OntarioLSIF Act"). Also, WV Canadian Fund is a LSIF registeredunder the Income Tax Act (Canada) (the "IncomeTax Act"). Each Fund is a mutual fund under the Legislation.
2. Each of the Funds is a reporting issuerin each of the Jurisdictions and is not on any list of defaultingreporting issuers maintained by the Decision Makers.
3. The outstanding capital of WV CanadianFund consists of Class A Shares, which are widely held, and1,000 Class B Shares, which are held by the Canadian Federationof Labour (the "Sponsor"). The outstanding capitalof WV Opportunity Fund consists of Class A Shares, which arewidely held, 1,000 Class B Shares held by the Sponsor, and1,500,000 Class C Shares, Series I, which are held by WV CanadianFund (the "Seed Capital").
4. A current prospectus dated January 20,2003 (the "Prospectus") qualifies the distributionof Class A Shares of the Funds in all provinces and territoriesexcept British Columbia.
5. WV Canadian Fund invests in small and medium-sizedCanadian businesses, that qualify as eligible investmentsunder the Income Tax Act, the Ontario LSIF Act and similarlegislation or pursuant to certain commitments undertakenin other provinces, with the objective of achieving long-termcapital appreciation. WV Opportunity Fund invests in smalland medium-sized Canadian businesses that qualify as eligibleinvestments for labour-sponsored investment funds under theOntario LSIF Act, with the objective of achieving long-termcapital appreciation.
6. GrowthWorks (WVIS) Ltd. (the "Manager"),formerly, Working Ventures Investment Services Inc., managesthe ongoing business and administration of the Funds, includinginvestment management and distribution of the Class A Sharesof the Funds.
7. As disclosed in the Prospectus, the Fundsmay invest in more than 10% of the securities of any one issuer,however such investments are generally made for business reasonsand not for the purpose of exercising control.
8. WV Canadian Fund invested in WV OpportunityFund through the Seed Capital shortly after WV OpportunityFund's formation and prior to the issuance of any Class AShares of the Fund. WV Canadian Fund's investment in WV OpportunityFund represents approximately 70% of the WV Opportunity Fund'snet asset value.
9. The arrangements between and in respectof each Fund are such as to avoid the duplication of managementand administrative fees.
10. Shareholders of WV Canadian Fund receivethe annual and, upon request, the semi-annual financial statementsof WV Canadian Fund, and receive the annual and, upon request,the semi-annual financial statements, of WV Opportunity Fundin a combined report containing the financial statements ofthe Funds.
11. In Ontario, an eligible investment (asdefined in section 204.8 of the Income Tax Act) of a labour-sponsoredinvestment fund corporation is deemed not to be an investmentby the fund in a person or company in which it is a substantialsecurity holder.
12. As the Seed Capital is not an eligibleinvestment under the Income Tax Act, the deeming provisiondescribed in paragraph 11 is not applicable. Therefore, WVCanadian Fund is a substantial securityholder of WV OpportunityFund, as a result of the Seed Capital.
13. Based on the market conditions, disposinginvestments of WV Opportunity Fund to redeem the Seed Capitalwould be unduly detrimental to shareholders of the WV OpportunityFund.
14. The Prospectus contains clear disclosureconcerning the investment by WV Canadian Fund in WV OpportunityFund, together with disclosure of the risk that if WV CanadianFund were to redeem a material portion of its investment,the liquidity of WV Opportunity Fund could be affected.
15. The Manager is of the view that it isin the best interests of WV Canadian Fund to hold the SeedCapital, and that such investment represented the businessjudgement of responsible persons uninfluenced by considerationsother than the best interests of WV Canadian Fund.
16. The Regulation to the Securities Act(Ontario) (the "Act") recognizes that certain rulesof the Ontario Securities Commission and certain restrictionscontained in the Act that govern conventional mutual fundsshould not be applicable to LSIFs. In general, the Regulationto the Act relieves LSIFs from many rules and restrictionsin the Act to allow for investment and practices of LSIFsthat are allowed under the Ontario LSIF Act.
17. The Seed Capital is an eligible investmentunder the Ontario LSIF Act.
18. WV Canadian Fund can make investmentsother than eligible investments, subject to certain requirements.As the Seed Capital is less than 20% of the total net assetvalue of WV Canadian Fund, WV Canadian Fund remains a LSIFunder the Income Tax Act, despite the fact that the Seed Capitalis not an "eligible investment".
19. WV Opportunity Fund has made one investmentin an issuer in which WV Canadian Fund holds voting securitiescarrying more than 10% of voting rights attached to all outstandingvoting securities of the issuer. Of the shares outstanding,WV Canadian Fund owns 15% and WV Opportunity Fund owns 3.14%of that issuer.
20. WV Opportunity Fund currently has approximately$15 million of assets under management, and WV Canadian Fundhas approximately $265 million of assets under management.WV Opportunity Fund's comparatively smaller size, makes itincreasingly difficult for the WV Opportunity Fund to identifysuitable eligible investments that meet the Fund's investmentobjective and requirements under the Ontario LSIF Act.
21. The market conditions are such that disposingof the existing investment that is prohibited by the SignificantInterest Restrictions would be unduly detrimental to shareholdersof WV Opportunity Fund. WV Opportunity Fund has the objectiveof achieving long term capital appreciation. Investments ofthis nature generally require two to six years in order tomature and generate expected returns by investors. Disposingof the investment at this time would likely result in lossesto WV Opportunity Fund.
22. The Manager is of the view that it isin the best interests of WV Opportunity Fund to make and holdthe existing and future investments in eligible businesseswhere WV Canadian Fund holds a significant interest and thatsuch investments by WV Opportunity Fund will represent thebusiness judgement of responsible persons uninfluenced byconsiderations other than the best interests of WV OpportunityFund.
AND WHEREAS under the System, this MRRSDecision Document evidences the decision of the Decision Makers(the "Decision");
AND WHEREAS each of the Decision Makersunder the Legislation is satisfied that the test contained inthe Legislation that provides the Decision Maker with the jurisdictionto make the Decision has been met;
THE DECISION of the Decision Makers underthe Legislation is that
i) the Investment Restrictions containedin the Legislation shall not apply to the Seed Capital byWV Canadian Fund in WV Opportunity Fund, and
ii) the Significant Interest Restrictionscontained in the Legislation shall not apply to WV OpportunityFund making and holding investments in issuers in whichWV Canadian Fund has a significant interest,
provided that the Seed Capital is an eligibleinvestment under the Ontario LSIF Act.
March 26, 2003.
"Paul M. Moore" "RobertW. Korthals"